What the future (and fashion) of David Jones looks like

It was a fairly typical November day in Melbourne's CBD when cosmetics mogul Napoleon Perdis, splendidly fitted out in an electric blue Gypsy Taylor suit, drove a tank down the Bourke Street mall and up to the doors of Myer's flagship city store.

The spectacle was to announce the rollout of Perdis' collection into Myer, ending an exclusive arrangement with arch rival David Jones - whose city store was right next door.

As Myer chief executive Bernie Brookes stood before the tank, made slightly less menacing by the site of a glittering Napoleon popping out from the hatch, a scallywag suggested to him if he slipped the make-up boss $100 he might fire the cannon at David Jones.

Shift to this week and David Jones has its own tank, this one in the form of a new owner in South African retail giant Woolworths Holdings, which is promising to transform and revitalise the 176-year old department store at the expense, no doubt, of rival Myer.

''They are really amazing retailers,'' Perdis told BusinessDay.

''They are smart, and what I like about the South Africans is they have had to do what Australians are doing now much earlier because of their own market conditions.

''They have a great sense of old-fashioned service, not just dumping stock on the floor but actually making sure its layered and communicates to different segments of the market.''

There is now a feeling among retail analysts, fashion designers, fashion buyers, bloggers and fashionistas in general that the Woolworths bid will mark a step-change in the course of Australia's $5 billion department store sector.

And things must change. Better service and more staff are in, as is quality private label apparel, which Woolworths is promising more of in David Jones once it gets its hands on it.

The change is being driven by the onslaught of online shopping and new northern-hemisphere retailers pouring into Australia such as Spanish fast-fashion brand Zara, Britain's Topshop and Swedish global clothing and housewares chain H&M.

''Department stores need to be innovative and creative and take that to the consumer,'' Mr Perdis said. ''So, whether it's private label or whether it's done through brands doesn't really matter, but the opportunity for private label in Australia if you bring enough innovation and creativity to it and you have the cash flow it to back it, there are huge opportunities.''

Woolworths boss Ian Moir, a former rugby player, canny Scot and not known for wearing shiny blue suits or driving tanks, had spent years studying David Jones and the local retail scene, even visiting half of David Jones' 38 stores, and was now aiming his billion-dollar guns right at Myer and every other fashion chain in the market.

''This is a natural progression of what we have been doing,'' Moir said this week after shocking the market with a $2.15 billion takeover bid for David Jones.

''We have got Country Road, we have added Witchery and Mimco to that and we are adding DJs again because we want to build one of the biggest retailers in the southern hemisphere.''

Woolworths, which has controlled Country Road for 15 years and recently picked up the two other fashion chains, is already acting and sounding like it owns David Jones. And why not? Its $4-a-share bid was set at 25 per cent above David Jones' recent share price and is so high that many believe no one will have the pockets or backbone to top it.

It's also 40 per cent above the David Jones share price before Myer's nil-premium merger proposal was made public, which now looks dead in the water with Myer withdrawing and forced to look elsewhere for the $85 million in savings it expected to book by merging with its chief competitor.

This frenzy is all at a time when the Australian department store sector has recorded a 1.8 per cent slide in annual growth since 2009, according to industry researchers IBISWorld, with growth to be an anaemic 0.4 per cent over the next five years.

''For department stores online shopping has become an issue; their value add was traditionally providing range and price.

''Now online shopping is still quite a small percentage of Australia's total retail spend, but what it has done is make consumers aware of range and of price, and that has increased the difficulty of conditions for Myer and David Jones.''

Moir will have none of that. Spending $2.15 billion of his company's money on David Jones at a time when revenue for Australia's two leading department stores are stagnant certainly shows he must be an optimist.

''The department store isn't dead, mediocrity is dead, poor retailing is dead,'' he declared. ''What we want to do is create the best department store in the southern hemisphere.''

It may be a sad fact but it seems that a Scot who runs a South African company will have to show the locals how to run a department store properly and profitably, and David Jones will be the Australian vehicle to do just that.

''The department sector in Australia is in a complete shift from where it was five years ago,'' said Christopher Kontos, marketing and creative manager for department store operator Harris Scarfe.

''We were very much isolated but e-commerce and online shopping have brought in different ideas of shopping, fashion and culture, it's more accessible now than ever.

''It's too early to work through the effect Woolworths purchasing David Jones will have in the Australian retail market. It's evident the company has been testing the waters in Australia with Country Road and now also Witchery and it makes sense to begin building a vertical brand strategy, as these two brands are already stocked in David Jones stores.''

Moir's plans for David Jones involve several key strategies but can be distilled down to lifting the retailer's sales of private label or ''company-owned'' brands, tighter supply chain and more investment in service and staff.

He has done it all before, using a similar approach to turn around the fortunes of Woolworths in South Africa and its 400-plus stores, as well as improving Country Road when he was chief executive of that Australian brand.

''Woolies has done a huge amount over the past five years and it's really worked for us: we have grown our top line by 10 per cent per annum, and we have grown profit by 20 per cent per annum over the past five years,'' Moir said.

''And we have done it by transforming our business, by accepting the world is changing, by being truly competitive and by investing in more design, more product development, better goods; by investing in skills and going direct to our sourcing markets as we build facilities in China.''

Moir has signalled already that Country Road will have a part to play in the David Jones turnaround. This would include a presence on David Jones' online site as well as in its stores.

''With the private label and introduction of Country Road group brands onto the David Jones site it makes it much more interesting, much more compelling, gives the customer a reason to go online.''

Speed will be crucial. Woolworths can turn around its key fashion lines in five to six weeks. Sixty per cent of its business is on 90 days or fewer turnaround from its supply chain.

''So, our customers are getting fashionable goods, getting them at great value, and our stores are great stores with customers engaged and the right mix of product in store.''

Its lightning-fast supply lines are helped by Woolworths' heavy reliance on private label fashion: brands it owns and has designed itself that sell well in its stores in South Africa and generate better profit margins than outside brands.

This is what Moir wants to bring to David Jones, setting a target of lifting the upmarket department store's sale of private label from the 3.5 per cent currently to more than 20 per cent and as high as 30 per cent in the near term. That would also match Myer, which has been much more successful at private label that its rival, with 20 per cent of its sales coming from company-owned brands.

This will help capture Woolworths' ambitious stated target of lifting David Jones' bottom line by $130 million a year within five years.

''Private label in David Jones is tiny, it's about 3 per cent, and it's not really private label, it's sourced through third parties in China. What we will do is take that 3 per cent to over 20 per cent,'' Moir said.

''And why wouldn't you do that? David Jones is one of the most loved, the most aspirational, the most recognised brands in this country. Why wouldn't you capitalise on that and why wouldn't you build great private label products?

''Private label products that really 'speak' to the customer. And we can do that through our sourcing base. We have a private label business that is more than 25 times that of David Jones. So, you immediately get economies of scale, you immediately get speed to market and fashionable products into your private label [offering].''

And this will be achieved with the help of better margins, with Moir playing up Woolworths' track record of its margins increasing by 500 basis points in the past five years in its home market of South Africa.

''That's a massive move, and that's exactly what we are going to do with David Jones' private label.''

The big question is whether David Jones can, under Woolworths' ownership, walk both sides of the department store street, offering a range of high-end, expensive fashion brands while also flooding its stores with private label clothes.

''I believe in private label brands and I believe in brands full stop,'' said Napoleon Perdis. ''And you can't walk away from brands, because consumers ultimately fall in love with brands.

''So, I think definitely there is a space to carve out more income from private label or at least win market share.''

Perdis said US department stores such as Macy's, Neiman Marcus and Nordstrom did this quite well by weaving in private label products through their stores and online without crowding out the pricey brands and putting off customers.

''I think that strategy in Australia could work really well,'' said Perdis, ''and help to counteract and fight the onslaught [from overseas retailers] Zara and H&M.''

Moir is confident he will win shoppers over.

''I don't think DJs has the infrastructure to do private label … it doesn't have the design skills, the production base, it doesn't have the sourcing skills; and that's what we are bringing to the party.

''So, when we talk about private label we are talking about a high-quality, well-designed, very appealing private label at very competitive prices, so I would expect product that is akin to Country Road quality, not akin to the current quality.''

IBISWorld's Caroline Finch said Woolworths had established teams ready to help transform David Jones through its ownership of Country Road, Witchery and Mimco.

''They have in-house design teams, they have in-house procurement specialists … so, they do know how to design clothes for the Australian market, to get them made overseas and then get sent back to Australia, and sell at a profit - and they would be looking to bring that expertise to David Jones.''

Moir certainly believes he has the team to deliver.

''We will have the best offer, the best-priced offer, the best fashionable offer in private label in Australia bar none.''

It's this ''fast-fashion model'' that has made northern-hemisphere retailers such as Zara and H&M, which recently opened its maiden store in Australia, such huge successes. Consumers want to buy fashion as soon as it is strutting down the catwalk, and people in Australia especially are no longer prepared to wait a season or a year for the latest look.

''No one is waiting a year or a month to get what is happening internationally,'' said Harris Scarfe's Christopher Kontos.

''It's all happening now, so whatever is happening in H&M in London or Paris you can buy in Australia now, and it's really very clever.''

And Australians are prepared to pay up for this ''fast fashion''.

This week on a blustery Melbourne day pouring with rain there was a queue 100 deep out the front of H&M's only local store. It was a scene not unlike the crowds that mill around nightclubs on a Saturday night hoping to be lucky enough to get in. Yet this was a clothes shop and in the midst of what we are told are gloomy times for discretionary retail.

Keeping up with David Jones

24 May, 1838 Welsh-born David Jones opens his store on the corner of George and Barrack streets in Sydney, intending to sell “the best and most exclusive goods”.

1887 The George Street store is rebuilt, boasting Sydney’s first hydraulic lift. Its range includes furniture and furnishings and in 1890 launches its first mail-order catalogue.

1927 David Jones opens its grand new Elizabeth Street store.

1959 The company now has eight stores in Sydney, and begins expanding interstate to Queensland, South Australia, Victoria and the ACT.

1980 David Jones is targeted by debt-fuelled corporate raider Adelaide Steamship Company, helmed by John Spalvins. The Lloyd Jones family loses control, and the David Jones business is enmeshed in a huge and complex corporate structure that also includes supermarket operator Woolworths.

1982 David Jones takes over and rebrands Melbourne’s Buckley & Nunn on Bourke St.

1990 The Adsteam empire collapses as its banks press for repayment of their debts. Shares in the conglomerate’s subsidiaries suffer cataclysmic dives in value – in David Jones’ case from $18 to 12¢.

1995 David Jones emerges from the AdSteam wreckage and is re-floated on the ASX at $2 a share. But it fails to meet its prospectus targets amid fears it is going too “downmarket”.

1997 South African-born ex-Myer executive Peter Wilkinson is installed as chief executive. He boosts sales and profitability but the share price fails to recover. He resigns in 2002 after the disastrous upmarket food venture Foodchain.

2002 Mark McInnes is appointed chief executive. He repositions David Jones as a “house of brands”, closes under- performing stores and presides over a profit, sales and share price recovery.

2008 The GFC hits, destroying consumer confidence. David Jones posts its worst quarterly sales result since the 2001 terrorist attacks.

2010 McInnes resigns after being accused of sexual harassment of a David Jones employee. Paul Zahra is appointed as his replacement; he plans to keep slashing costs to meet targets.

October 2013 Zahra announces plans to retire, citing “burnout”.

January 21, 2014 Fairfax Media reveals David Jones was approached by rival Myer for a scrip-based merger in late 2013, which the company elected not to disclose. News of the approach, coupled with outcry over share trading by two David Jones directors, sparks a shareholder revolt and Zahra agrees to stay on.